The past three years have been tricky for global bonds. Historically low interest rates throughout the developed world have driven yields down in both the government and the corporate bond spaces.
While equities have enjoyed the fruits of super-loose monetary policy, bond investors have been waiting nervously for the 'bloodbath' that many commentators claimed would ensue once central banks lifted interest rates off the floor, driving bond prices down and leading to capital losses.
However, the carnage has failed to materialise. In fact, 2014 and 2015 were relatively stable years for many bond markets compared with equity markets.
COULD BONDS ENJOY ANOTHER CALM YEAR?
Meanwhile, the likelihood of developed market interest rate rises continues to dwindle: the Bank of England is not expected to raise rates until mid-2017 at the earliest, while some analysts argue that the US Federal Reserve may be forced to reverse its December 2015 0.25 per cent interest rate hike in the face of global growth fears.
So could bonds enjoy another calm, or even positive, year? The fortunes of the various funds in the Investment Association's (IA's) global bond sector in recent years suggest this will depend on where and in which currency a fund is invested.
Over the three years to 1 February the returns delivered by the best and worst performers were poles apart: while GAM Star Credit Opportunities USD delivered an impressive 34 per cent, Pictet Latin American Local Currency Debt shed more than 28 per cent - a 62 per cent difference.
This is unsurprising considering the very different asset classes these two funds invest in: developed market investment grade debt versus local currency-denominated emerging market debt, which along with emerging market equities has taken a regular beating since 2013.
Indeed, it is questionable whether Pictet's fund even belongs in the global bond sector as opposed to the global emerging market bond sector.
However, the IA's sector classification dictates that an emerging market bond fund must be diversified across a number of emerging markets. That rule, perversely, keeps it in the global sector, along with another eight other funds that invest solely or largely in emerging market debt.
Money Observer Rated Fund GAM Star Credit Opportunities USD has been a notable success among its peers in recent years, with its three-year return nearly 7 per cent higher than that of its nearest competitor, Pimco GIS Global Bond Ex US, which has returned 28 per cent since 1 February 2013.
GAM Star Credit Opportunities USD, managed by the highly rated Anthony Smouha since 2011, is largely invested in UK and European corporate bonds (67 per cent), with banks, energy companies and big-ticket retailers dominating its top 10 holdings.
The fund's success, however, hinges on the fact that it is denominated in dollars and has benefited from the 10 per cent rise in the value of the dollar against the pound over the past three years.
In contrast, the euro-denominated version of the fund - GAM Star Credit Opportunities EUR - has returned only 13 per cent over the period, although it does have a slightly different portfolio. Nonetheless, this return puts it in the first quartile of the sector.
Over the past year, the sector picture looks slightly different. While the strength of the dollar remains a constant in the recipe for success, the dominant asset class has changed.
In the 12 months to 1 February, the best-performing fund was Pioneer Sicav Emerging Markets Bond, which returned 7.4 per cent, compared with an average loss of 0.6 per cent from the sector.
In fact, of the 10 top-performing global bond funds over the past year, three are invested in emerging market hard currency-denominated (the dollar, sterling or the euro) debt.
As the economic and political landscape across emerging markets begins to settle - particularly in Brazil and Argentina - and yields in developed markets continue to shrink, some investors believe the tide is turning for emerging market debt. Among them is Chris Iggo, chief investment officer, fixed income at Axa Investment Managers.
He says: 'Emerging market debt is a universe ripe for finding value opportunities. Not all emerging market economies are in recession, not all suffer from lower oil prices, and not all are facing a debt squeeze because of a higher dollar.'
With yields on emerging market sovereign bonds currently around 6 per cent and returns for hard currency indices just behind developed market investment grade credit so far in 2016, Iggo predicts that returns on emerging market debt may beat developed market investment grade this year.